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Synopsis

In Volatility Trading, Sinclair offers you a quantitativemodel for measuring volatility in order to gain an edge in youreveryday option trading endeavors. With an accessible,straightforward approach. He guides traders through the basics ofoption pricing, volatility measurement, hedging, money management,and trade evaluation. In addition, Sinclair explains theoften-overlooked psychological aspects of trading, revealing bothhow behavioral psychology can create market conditions traders cantake advantage of-and how it can lead them astray. Psychologicalbiases, he asserts, are probably the drivers behind most sources ofedge available to a volatility trader.

Your goal, Sinclair explains, must be clearly defined and easilyexpressed-if you cannot explain it in one sentence, you probablyaren't completely clear about what it is. The same applies to yourstatistical edge. If you do not know exactly what your edge is, youshouldn't trade. He shows how, in addition to the numericalevaluation of a potential trade, you should be able to identify andevaluate the reason why implied volatility is priced where it is,that is, why an edge exists. This means it is also necessary to beon top of recent news stories, sector trends, and behavioralpsychology. Finally, Sinclair underscores why trades need to besized correctly, which means that each trade is evaluated accordingto its projected return and risk in the overall context of yourgoals.

As the author concludes, while we also need to pay attention toseemingly mundane things like having good execution software, acomfortable office, and getting enough sleep, it is knowledge thatis the ultimate source of edge. So, all else being equal, thetrader with the greater knowledge will be the more successful. Thisbook, and its companion CD-ROM, will provide that knowledge. TheCD-ROM includes spreadsheets designed to help you forecastvolatility and evaluate trades together with simulation engines.

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